Prospect Capital’s (PSEC) portfolio generated an annualized yield of 12.8% across its interest-bearing investments in fiscal 1Q17. This yield represents a 0.2% fall from fiscal 4Q16 and a 0.5% rise over fiscal 4Q15. These yields exclude capital appreciation and dividend payouts from the company’s equity positions. Yields fell due to deployments in low-rate offerings.
Prospect has increased its exposure in structured credit and online lending in a bid to garner higher yields. Among peers, Prospect manages the highest yields on its portfolio. Its structure provides flexibility for investing in multiple levels of corporate capital, with a preference for secured and structured lending.
As of September 30, 2016, Prospect Capital’s overall portfolio consisted of 123 long-term investments, with a fair value of $6.1 billion. As of December 31, 2014, Prospect had 138 investments, with a valuation of $6 billion. These changes reflect the company’s shift toward marginally larger investments, yielding higher returns.
Prospect’s industry peers with considerable assets under management include the following:
- Carlyle Group (CG): $194 billion
- KKR & Company (KKR): $98 billion
- Apollo Global Management (APO): $163 billion
Together, these companies make up 1.3% of the Financial Select Sector SPDR ETF (XLF).
Prospect saw net investments in fiscal 1Q17 (September quarter) as compared to net exits in the previous few quarters in its bid to redeploy capital toward structured lending and CLOs (collateralized loan obligations). The company is deploying less capital in high-quality assets such as first-lien debts, and this has resulted in a lower composition of its first-lien investments.
Prospect saw some yield contraction in fiscal 1Q17 due to exits from select investment, but it has managed higher yields than its peers by deploying a strong origination strategy.
In fiscal 1Q17, its portfolio’s fair value was made up of the following proportions of assets:
- 51.5% first-lien debts
- 19.5% second-lien debts
- 16.9% collateralized loan obligation structured credit
- 0.2% small business whole loan
- 1.1% unsecured debt
- 10.8% equity investments
In the next part of the series, we’ll study Prospect Capital’s portfolio-building strategy.